Amazon (NASDAQ:AMZN) is reportedly planning to sell set-top boxes of its own and could introduce the device during the upcoming holiday season. [1] This will put the company in direct competition with Roku, Motorola and Apple (NASDAQ:AAPL). The set-top box will enable Amazon Prime video service to stream directly to TVs and will also feature apps and services from other parties. The company has been competing with Netflix (NASDAQ:NFLX) for a long time, but hasn’t really taken true advantage of its distribution capabilities until now. It can sell the set-top box directly online, or strike partnerships with the pay-TV companies to distribute them. We believe that the idea is not to make money from this hardware, but to promote the services offered through it. In all likelihood, Amazon is also going to promote sales of its regular merchandise through in-built apps in these set-top boxes.

Amazon had over 22,000 titles in its streaming library in August 2012, which represented 70% growth in 2012 alone. [2] By the end of June 2013, the number of streaming titles increased to 41,000, representing an annualized growth of roughly 100%. [3]

Amazon continues to strike new deals and is placing greater emphasis on kids-focused programming. The company mentioned that such programs are one of the most watched TV genres on its Prime video service. Last year, several analysts attributed the decline in TV ratings of Nickelodeon to more kids watching programs on alternative platforms such as Netflix. This again reinforces the popularity of kids-focused content on the Internet. Amazon can leverage its recent deal with Viacom to add more content to its Lovefilm service in Europe. This is another market where Netflix is trying to expand. Given that Lovefilm is a known brand in the region, better content along with improved streaming quality and user interface can help Amazon grow.

Besides this, Amazon Studios, the company’s original movie and series production arm, has been working on bringing more original content to Amazon Prime’s arsenal.

How Big Is The Streaming Business Right Now?

According to a Morningstar analyst, Amazon Prime had more than 10 million members as of March 2012. [4] Assuming that the member count is somewhere close to 11-12 million currently, Amazon would be earning close to $870 million to $950 million in annualized revenues at membership fee of $79 per year. However’ that’s not what Amazon is getting from streaming, as Amazon Prime’s subscription offers free shipping along with the access to video content. The correct question to ask would be – how valuable is Amazon Prime service to the company? Streaming content is just acting as one of the key features of the service that attract subscribers.

According to a report, Prime customers tend to buy twice as much as the regular customers and overall accounted for 10% of the purchases in 2012. [4] This proportion could increase going forward as Amazon continues to invest in the streaming content to lure in more buyers. There is lot of incentive for the company to promote this service, which implies that it will be willing to shell out significant amount of money from its pocket to improve the content. This means trouble for Netflix as Amazon’s ambitions could lead to a content bidding war, thus putting pressure on the former’s margins.

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